California’s AB 130, which took effect July 1, 2025, brings the biggest changes to the State’s mortgage servicing and foreclosure rules in over a decade. While many headlines focus on new rules for ADUs, affordable housing, and local permitting, there’s a critical piece of this law that directly impacts private money loans, second position financing, and even how brokers and agents structure deals.
If you’re a lender, real estate broker, agent, or investor working with private financing, especially hard money seconds or other subordinate liens, this is a law you should pay attention to. It could dramatically affect how these loans are serviced, collected, and ultimately enforced.
What’s Changed Under AB 130?
AB 130 adds new requirements under California Civil Code §2924.13 aimed at “zombie loans” (old subordinate mortgages that might have been ignored or poorly serviced for years). But the law is written far more broadly:
- It applies to ALL subordinate loans on residential property, including business purpose loans, not only consumer mortgages.
- It applies to all residential properties, not just 1-4 units. 5+ units apply to this new law.
- It applies retroactively. Even loans made years ago are subject to these new rules.
- It requires strict compliance history, covering the current servicer and all prior servicers on the loan, including Seller-Carrybacks!
There Are Six Traps That Can Render a Subordinate Lien Unenforceable
Before a subordinate lender (Private or Conventional) can start or even threaten foreclosure on a second, or junior position mortgage, AB 130 now requires recording a Certification of Compliance under penalty of perjury. This certification must affirm that NONE of the following occurred during the ENTIRE life of the loan:
- No written contact for 3+ years with the borrower.
- A missed servicing transfer notice.
- A missed ownership transfer notice.
- Any statement to the effect that the loan was written off.
- Any threatening of foreclosure before the certification is done.
- Failed to send any legally required statements.
Why Should Brokers and Agents Care?
Because these rules directly impact the enforceability of the second mortgages you might help clients obtain or subordinate to in purchase deals, bridge loans, or cash-out scenarios. A lender who cannot foreclose may decide not to fund at all, or offer far stricter terms.
Why Should Investors Care?
Because buying or holding second liens in California just got riskier. Investors need to review historical servicing data to ensure none of these violations exist before funding or purchasing a note. The last thing anyone wants is a subordinate lien that cannot be enforced because of a compliance failure by a prior servicer.
Borrowers can now file in court to halt a foreclosure if they believe any violation occurred. The court can bar the foreclosure, reduce payoff demands, or even set aside a completed sale, except for sales to bona fide third-party buyers, which remain protected.
While lenders can technically list violations in their certification, doing so invites court scrutiny. Many private lenders may simply decide not to foreclose rather than risk perjury or protracted litigation.
There Are Ways to Protect Your Loans and Clients
- Audit old loans and servicing files. Make sure the chain of servicing notices, ownership notices, and statements are solid.
- Advise clients carefully when subordinate financing is involved. Whether it’s a purchase, a refinance with a new second, or an investment buy, make sure all parties understand the new compliance landscape.
- Avoid casual “threats of foreclosure.” Collection letters should be reviewed to ensure they don’t imply foreclosure without first complying with AB 130.
- Consider due diligence questions for lenders. Ask if they’ve reviewed their files under AB 130 standards, or if they’ll certify the absence of these violations before funding or closing.
California’s real estate laws continue to evolve, and AB 130 is reshaping the world of private money, second position loans, and foreclosure risk. Brokers and agents can stand out by helping clients navigate these changes proactively, whether that means structuring deals to avoid compliance pitfalls or connecting them with lenders who have airtight servicing histories.
Need help reviewing your loan structures or sourcing Private Money lenders who are fully compliant under California’s new rules? Whether you’re looking to purchase, explore trust deed investing, or want guidance on your next home move, we’re here and ready to help!
Pacific Direct Mortgage is a Santa Rosa, California private money direct lender, offering Hard Money loans for single family, multi family, and investment real estate throughout California and Sonoma County.
